Rental contracts - changes in income tax

If you rent out a property in Portugal then be aware that there are some changes in the amount of income tax (IRS) that you will have to pay on your rental income when it is declared. Regardless of the initial duration of the lease, it is the renewals that will determine, whenever they occur, the personal income tax (IRS) rate to be applied to the income that may be obtained. According to an order given by the Secretary of State for Tax Affairs, this is one of the rules that the tax authorities will have to apply when making the income tax assessment to the property income from long-term lease agreements.

At issue are the new income tax rates which are staggered according to the duration of rental contracts. This came into force in January 2019 and will now be taken into account, for the first time, in the income tax campaign this year, stated by the Portuguese newspaper, the Jornal de Negócios. 

With the enforcement of the new law, there is a reduction in the normal income tax rate of 28% for longer contracts: between two and five years the rate drops to 26% and for contracts between five and ten years it drops to 23%, and in both cases the same reduction will occur in subsequent renewals, until the rate is only 14%. Contracts of ten years or more will have a reduction in the rate to half - 14% - while those over 20 years will only pay 10% tax.

According to the publication, these rates apply to new contracts, but also to renewals of existing contracts which are in the meantime, renewed with the same tenants. This ruling had already been stated by the government, but it remained to be seen how the new rate should be determined in the event of a renewal.

Therefore, according to the internal instructions now known, if the contract already in force has a different duration from the renewal that follows it, both deadlines have to be combined. In other words, a six-year contract renewed for a further three years would already benefit from a rate of 23%, and would then be entitled to a further reduction of 2%, to 21%.

An initial contract of four years that is then renewed for five more years would pay 26% and will be entitled to a reduction of 5%, to 21%.

An identical logic will apply to contracts prior to 1st January, 2019 (the date of enforcement of the new law) that are subject to renewal. Whatever the period they had until then, what counts is the number of years for which they are renewed, writes Jornal de Negócios. 

In the case of a contract renewal that takes place in the middle of the year, two fees will apply. The normal rate, of 28%, will apply until the end of the contract and the new rate, with the reduction will be applied from the first month of the contract renewal and the income obtained from then on. 

Article seen at: Rendas vão ter taxas de IRS progressivas. Saiba como vão funcionar (Jornal de negócios)